Week in Review June 2, 2017

Week in Review June 2, 2017

Friday’s unexpectedly weak jobs report for May, which sent long-term bond yields down to their lowest levels since last November, calls into question the Federal Reserve’s likelihood to raise interest rates at its June meeting.

Prior to the release of the jobs report – which showed the economy added just 138,000 jobs last month, nearly 50,000 below expectations, plus a downward revision by an additional 66,000 jobs the previous two months – the market consensus called for the Fed to raise rates by 25 basis points at its June 13-14 meeting. But combined with some other rather lackluster indicators released during the week, a rate rise now seems iffy at best. While the unemployment rate fell to a 16-year low of 4.3%, the Labor Department report also showed the participation rate falling to 62.7% and the annual growth rate in average hourly earnings slipping to 2.5%.

Bond yields dropped sharply after the release of the report, while stock prices finished higher both for the day and the week. The yield on the benchmark 10-year Treasury note fell five basis points on Friday and about nine bps for the week, closing at 2.16%, its lowest level since last November 10, two days after the presidential election. In stocks, NASDAQ gained 1.5% for the week while the S&P 500 rose 1.0% and the Dow added 0.7%. Outside the U.S., the Stoxx Europe 600 rose 0.3% for the week as European Central Bank President Mario Draghi threw cold water on the idea that the ECB should start ending its stimulus measures. Japan’s Nikkei 225 rose 2.5%.

Several other important economic indicators were released last week, most of which showed a return to lackluster growth. The Fed’s Beige Book covering most of April and May said that “a majority of districts reported that firms expressed positive near-term outlooks; however, optimism waned somewhat in a few districts.” Notably, “Boston and Chicago signaled that growth in their districts had slowed somewhat to a modest pace, while New York indicated that activity had flattened out. Consumer spending softened, with many districts noting little or no change in nonauto retail sales, while auto sales have edged down from last year’s record highs in several districts.” Elsewhere, the ISM manufacturing index for May came in at 54.9, basically unchanged from the prior month.

Housing sector numbers continued to show weakening. The National Association of Realtors’ pending home sales index fell unexpectedly by 1.3% in April after falling 0.9% in March. The index, a forward indicator of home sales, is now 3.3% below its year-ago level, its first year-over-year decline since last December and the largest since June 2014. Lawrence Yun, the NAR’s chief economist, said buyers are feeling the “double whammy” of low housing inventory, which is down 9% compared to a year ago, and “price appreciation that’s much faster than any rise they’ve likely seen in their income.” Indeed, the widely-watched S&P Corelogic Case-Shiller 20-city home price index rose 0.9% in March. Construction spending fell 1.4%, led by a 0.7% decline in the residential sector, the first in seven months. Elsewhere, consumer incomes and spending were both up 0.4% in April, in line with expectations, although the personal-consumption expenditures price index, the Fed’s main measurement of inflation, rose 1.7% on a yearly basis, down from the prior month’s 1.9% increase. The Conference Board’s consumer confidence index fell slightly to 117.9 in May but remained above 110 for the sixth straight month.

Reports/dates/facts/links worth paying attention to over the next week: